4/13/2009 @ 12:01AM

Doom Or Boom?

As Earth Day approaches, environmentalists are bemoaning the impending death of cap-and-trade. The Obama White House offered ambitious revenue estimates for a cap-and-trade program in its proposed budget, but Congressional Democrats have made it fairly clear that they wont risk following through, at least not this year. Whereas health care legislation has a chance of getting through Congress, any successful cap-and-trade legislation would have to secure at least sixty votes in the Senate–and that, simply put, is unimaginable.

During last years “Drill, baby, drill! mania, Republicans discovered that cheap energy is one of their most effective applause lines. And though gas prices have plummeted since those heady days, the economic downturn has only strengthened the populist case against cap-and-trade. Having identified a rare Democratic vulnerability, Senate Republicans have pressed their advantage.

As Roger Pielke Jr. has been chronicling at his indispensable Prometheusblog, Sens. John Ensign and John Thune have used Democratic talking points against climate change legislation. Thune offered an amendment to the budget resolution that requires any cap-and-trade measure not increase electricity or gasoline prices, a measure that passed by an overwhelming 89 to 8 votes, including 48 Democrats. But this is nonsensical: Most of our sources of energy emit carbon, and the whole point of cap-and-trade is to make carbon-emitting energy sources more expensive.

Ensign, meanwhile, garnered 98 votes for an amendment that bars any climate-change legislation from raising taxes on middle-class taxpayers–which the Obama campaign defined as any household making less than $250,000. While it is possible to design a cap-and-trade system that compensates households earning less than $250,000, implementing it would be a challenge. Moreover, the affluent voters bearing the burden, a slight majority of whom voted for Barack Obama, would fight any such proposal with unmatched vigor.

Even if cap-and-trade legislation does manage to get past these ingenious stratagems, there is a deeper problem. Cap-and-trade essentially rations the right to emit carbon, and then allows firms to buy, sell, and trade the ration cards. The system creates a virtual commodity that is an artifact of legislation. And like any such commodity, it is subject to tremendous instability as lobbyists press to adjust the cap in response to changing economic conditions or the threat of layoffs or, say, the refusal of China and India and Brazil to follow suit with their own carbon caps.

Weve seen this happen in the E.U., where a cap-and-trade regime has failed to reduce carbon emissions. A carbon tax, in contrast, is far more transparent. If the goal is to set clear price signals, carbon taxes are clearly preferable to cap-and-trade. James Hansen, head of NASAs Goddard Institute for Space Studies and a leading voice for aggressive action against climate change, has raised the specter of electricity suppliers threatening the public with blackouts if a serious cap is enforced. The rolling blackouts that plagued California in the summer of 2005–which helped drive then-Gov. Gray Davis out of office–could be a hint of whats to come.

To prevent this outcome, Hansen favors a carbon tax that pays out all of its revenue in the form of a dividend. Think of it as a green version of Alaskas Permanent Fund, one that would be of particular benefit to Americans who live in big cities and strenuously avoid airplanes. It is easy to see why Hansen, an undeniably brilliant man, likes this idea. Unlike cap-and-trade, which, as Thune and Ensign have demonstrated, is pretty frightening to strapped middle-income households, tax-and-dividend instantly creates its own constituency: every household that gets a net benefit out of the deal.

As a committed urbanite, tax-and-dividend would certainly serve my narrow self-interest. Yet there is a serious downside to this approach. Hansen notes that cap-and-trade has been a bust in Europe, but neglected to mention that a carbon tax failed to prevent per-capita carbon emissions from increasing sharply in Norway. As Northwestern sociologist Monica Prasad has noted, however, Denmark used a carbon tax to far greater effect: between 1990 and 2005, per-capita carbon emissions in Denmark fell by a stunning 15%. Denmark didnt achieve this through a tax-and-dividend approach, like that favored by Hansen. Rather, the Danes give the tax revenues to firms that switch to alternative energy sources.

While Hansens approach is politically appealing, the beneficiaries of the divided arent going to want to see it shrink over time. The carbon tax revenues become their own reward, thereby lessening pressure to really reduce carbon emissions over time. One is tempted to suggest that the U.S. should adopt the Danish approach. Unfortunately, its hard to imagine our country, which is structurally more carbon-intensive, will embrace anything like it.

Pricing carbon was always going to be a tough sell. During a time of serious economic anxiety, it is an all but impossible sell. What happens if this downturn lasts for years? Leading environmentalists have made a serious mistake by investing all their political capital in unworkable cap-and-trade systems and ineffective and unpopular carbon taxes. As Ted Nordhaus and Michael Shellenberger have been arguing for years, environmentalists should abandon that approach in favor of emphasizing investment in alternative energy.

One promising strategy, vividly outlined by Mariah Blake in the latest issue of The Washington Monthly, involves feed-in tariffs, which mandate utilities buy renewable energy from all producers on a cost-plus basis. In Germany, where feed-in tariffs have been in place for over a decade, the measure has created a flourishing green energy industry. The beauty of this approach is that it is decentralized, and it has the added benefit of making our electricity grid more resilient, thanks to greater diversity of supply.

If the environmentalist Left doesnt embrace this idea, if they choose instead to emphasize the virtues of imposing economic pain, the environmentalist Right should adopt it as its own.

Reihan Salam is a fellow at the New America Foundation. The co-author of Grand New Party: How Republicans Can Win the Working Class and Save the American Dream, he writes a weekly column for Forbes.